CEO Optimism and Competitive Shocks
61 Pages Posted: 23 Aug 2018 Last revised: 20 Oct 2021
Date Written: October 2, 2021
We examine differences in how overoptimistic and non-overoptimistic CEOs respond and perform when faced with competitive shocks. Using tariff reductions as exogenous shocks to competition and triple difference-in-differences specifications on matched samples, we find that when competition increases, firms with overoptimistic CEOs slash their profit margins and increase research and development and advertising more than non-overoptimistic CEOs do. These firms achieve increased domestic market share and increased value relative to firms led by non-overoptimistic CEOs. Our empirical results support extant theories that predict that CEO overoptimism is beneficial under increased competition.
Keywords: CEO overconfidence, competition, tariffs, firm value, market share
JEL Classification: D22, L11, G31, F14, M12
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